Principles of Economics 2e
2nd Edition
ISBN: 9781947172364
Author: Steven A. Greenlaw; David Shapiro
Publisher: OpenStax
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Textbook Question
Chapter 28, Problem 38P
Suppose the Fed conducts an open market purchase by buying
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Suppose the Fed conducts an open market sale by selling $10 million in Treasury bonds to Great Western Bank. Sketch out the balance sheet changes that will occur as Great Western restores its required reserves (10% of deposits) by reducing its loans. The initial balance sheet for Great Western Bank contains the following information (all in $ millions): Assets – reserves 30, bonds 50, and loans 250; Liabilities – deposits 300 and equity 30.
Assume that the following balance sheet portrays the state of the banking system. The banks currently have no excess reserves.
Assets
Liabilities and Net Worth
(Billions of Dollars)
Total reserves
5
Checkable deposits
50
Loans
25
Securities
20
Total
50
Total
50
What is the required reserve ratio?
25%
40%
5%
10%
Suppose that the Federal Reserve (the "Fed") buys $4 million of bonds from a bond dealer, who immediately deposits the funds in her checking account. What is the initial impact of this transaction?
Checkable deposits rise by $4 million, and the banking system's holdings of securities rise by $4 million.
The banking system's holdings of securities rise by $4 million, and the banking system's total reserves fall by $4 million.
Checkable deposits rise by $4 million, and the banking system's total reserves rise by $4 million.
The banking system's holdings of securities fall by $4 million,…
Money Supply
Money Demand
Interest Rate
Investment (at Interest Rate Shown)
$400
$600
2%
$700
$400
500
3
600
$400
400
4
500
$400
300
5
300
$400
200
6
200
Answer the question on the basis of the information in the table. Suppose the legal reserve requirement is 20 percent and initially there are no excess reserves in the banking system. If the Fed wished to reduce the interest rate by 1 percentage point, it would
A)
sell $10 of government bonds in the open market.
B)
sell $20 of government bonds in the open market.
C)
buy $10 of government bonds in the open market.
D)
buy $20 of government bonds in the open market.
Chapter 28 Solutions
Principles of Economics 2e
Ch. 28 - Why is it important for the members of the Board...Ch. 28 - Given the danger of bank runs, why do banks not...Ch. 28 - Bank runs are often described as self-fulfilling...Ch. 28 - If the central bank sells 500 in bonds to a bank...Ch. 28 - What would be the effect of increasing the banks...Ch. 28 - Why does contractionary monetary policy cause...Ch. 28 - Why does expansionary monetary policy causes...Ch. 28 - Why might banks want to hold excess reserves in...Ch. 28 - Why might the velocity of money change...Ch. 28 - How is a central bank different from a typical...
Ch. 28 - List the three traditional tools that a central...Ch. 28 - How is bank regulation linked to the conduct of...Ch. 28 - What is a bank run?Ch. 28 - In a program of deposit insurance as it is...Ch. 28 - In government programs of bank supervision, what...Ch. 28 - What is the lender of last resort?Ch. 28 - Name and briefly describe the responsibilities of...Ch. 28 - Explain how to use an open market operation to...Ch. 28 - Explain how to use the reserve requirement to...Ch. 28 - Explain how to use the discount rate to expand the...Ch. 28 - How do the expansionary and contractionary...Ch. 28 - How do tight and loose monetary policy affect...Ch. 28 - How do expansionary, tight, contractionary, and...Ch. 28 - Which kind of monetary policy would you expect in...Ch. 28 - Explain how to use quantitative easing to...Ch. 28 - Which kind of monetary policy would you expect in...Ch. 28 - How might each of the following factors complicate...Ch. 28 - Define the velocity of the moneyCh. 28 - What is the basic quantity equation of money?Ch. 28 - How does a monetary policy of inflation target...Ch. 28 - Why do presidents typically reappoint Chairs of...Ch. 28 - In what ways might monetary policy be superior to...Ch. 28 - The term moral hazard describes increases in risky...Ch. 28 - Explain what would happen if banks were notified...Ch. 28 - A well-known economic model called the Phillips...Ch. 28 - How does rule-based monetary policy differ from...Ch. 28 - Is it preferable for central banks to primarily...Ch. 28 - Suppose the Fed conducts an open market purchase...Ch. 28 - Suppose the Fed conducts an open market sale by...Ch. 28 - All other things being equal, by how much will...Ch. 28 - Suppose now that economists expect the velocity of...Ch. 28 - If GDP is 1,500 and the money supply is 400, what...Ch. 28 - If GDP now rises to 1,600, but the money supply...Ch. 28 - If GDP now falls back to 1,500 and the money...
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- Suppose again that checkable deposits started off as $400,000 in First Main Street Bank, the required reserve ratio (r) is 15%, with and there are no excess reserves and no cash leakage. Suppose the Fed buys $8,000 worth of government securities from First Main Street Bank. Complete the following table to reflect the Fed's purchase on the balance sheet for First Main Street Bank. Reserves Loans Assets Liabilities Checkable Deposits $400,000 Does First Main Street Bank have any excess reserves now? No; the bank has zero excess reserves. OYes; the bank has $1,200 in excess reserves. O Yes; the bank has $51,000 in excess reserves. Yes; the bank has $8,000 in excess reserves.arrow_forwardAnswer the next question on the basis of the following consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 20%. All figures are in billions. Liabilities & Net Worth (billions of dollars) Assets (billions of dollars) Reserves $200 Checkable deposits $1000 Securities 300Stock shares 400 Loans 500 Property 400 Suppose the Fed wants to increase the money supply by $1,000 billion to drive down interest rates and stimulate the economy. To accomplish this, it could lower the reserve requirement from 20% to A) 12% OB) 15% C) 14% D) 10%arrow_forwardBelow is a short version of the balance sheet at Wells Fargo. Assume this bank has a 15% reserve requirement. Wells Fargo Assets Liabilities Total Reserves $250,000 Deposits $100,000 1. What is the maximum this bank can lend out? $ 2. Mr. Smithers decides to withdraw $25,000 from his checking account here after which the bank will now make $45,000 in loans and purchase $14,000 in securities from the Fed. After all these transactions take place, answer the following questions. (Enter your response rounded to the nearest whole number). a. The bank now has Total Reserves in the amount of $☐ b. The bank now has Required Reserves in the amount of $ c. The bank now has Excess Reserves in the amount of $ d. The bank is now limited to making additional loans up to the amount of $ e. The value of the simple money multiplier is (round to just 1 decimal) f. Should this bank lend its entire remaining reserves, the banking system can see an increase in the money supply of $arrow_forward
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